Important Advice for the Investor

Since individual investors are not going to take
the time to do the necessary "homework" it is important to know where
to get information.  At "A Dash" we believe in finding and using
the best sources for each type of problem.

The consumer of financial information must be alert for analytical
errors.  Often these come when someone is stepping outside his or her
normal area of expertise.  Take yesterday’s New York Times article
on the potential for a recession.  The evidentiary questions in the David
Leonhardt analysis should be a red flag for readers.  I reviewed those
problems here.

But let’s take a broader view of Leonhardt’s approach.  He says that a
recession is a 50-50 chance even though the forecast of economists compiled by the
Philly Fed sees the downturn chances at 10% next quarter and 16% in two
quarters.  He does not cite the recession forecast for one year out,
probably because it is only
and does not fit his thesis very well.

Leonhardt thinks that he can do better than the economists because while they may pick up on "subtle shifts" in consumer and business behavior they don’t "put the pieces together."  Put another way, he thinks that he can do economics better than they can, from his general reading and by looking at the summarized results of their forecasts.  Indeed!

Leonhardt is telling you something that you will not hear from Wall Street Economists or from "top Fed officials.  The former group provides "sunny forecasts" to help sell stocks and investment banking.  This statement may sound plausible to those who have not read the wide range of Street opinion, but it makes little sense to those of us who have.

The Fed is afraid they will spook the economy, so they do not talk about the possibility of a recession.  You can check this opinion yourself by Googling the name of any Fed Governor and the word "recession."  You could also go to the staff site and search for recession.  It is a constant subject of research and discussion.  Does Leonhardt believe that the Governors talk about recession chances when the Open Market Committee meets, but then keep the real story out of the minutes?

His opinion sounds like those of someone who has never taken a course in political science, and certainly has not read a book like Laurence Meyer’s.

The individual investor must learn to recognize when someone with a bully pulpit is going a little too far.  If David Leonhardt was an isolated example, this would not be important.  He is one prominent case among many.

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One comment

  • Barry Ritholtz September 2, 2006  

    I guess everything is relevant — but I see many more examples of cheerleading/spinning bad news and data than I do pessimistic reporting.
    Then again, I have worked on Wall Street for the past decade (or so). The vast majority of research, commentary and press releases have been geared towards gathering assets and generating transactions (of all sorts).
    When Leonhardt quotes people at ECRI — who have an excellent track record — its worth paying attention to . . .